Pallegedara, Asankha (2012): Dynamic relationships between stock market performance and short term interest rate Empirical evidence from Sri Lanka.
Download (157Kb) | Preview
This study examines the dynamic relationships between stock market performance and the interest rates in Sri Lanka during June 2004 to April 2011. We use all share price index in the Colombo stock exchange as a measure of stock market performance indicator and Sri Lanka interbank offer rate as a measure of interest rate. We employ some conventional time series econometric techniques namely Unit root test, cointegration test, vector auto correction model (VECM), Granger-Causality test and Impulse response functions (IRF) to trace out the relationships between stock market index and interest rate. The findings of interest include stock market performance is negatively associated with interest rate in the long run while no causal relationship is found in the short run.
|Item Type:||MPRA Paper|
|Original Title:||Dynamic relationships between stock market performance and short term interest rate Empirical evidence from Sri Lanka|
|Keywords:||Colombo Stock Exchange; interest rate; cointegration; vector error correction model|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets
E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy
|Depositing User:||Asankha Pallegedara|
|Date Deposited:||12. Sep 2012 13:04|
|Last Modified:||12. Feb 2013 07:48|
Arango, L., Gonzalez, A. and Posada, C. (2002), "Returns and interest rate: A nonlinear relationship in the Bogota stock market ", Applied Financial Economics, Vol.12 No. 11, pp. 835-42.
Aydemir, O. and Demirhan, E. (2009), "The relationship between stock prices and exchange rates: Evidence from Turkey", International Research Journal of Finance and Economics, Issue 23, pp. 207-15.
Campbell, J. (1987), "Stock returns and the term structure", Journal of Financial Economics, Vol. 18 Issue 2, pp. 373-99.
Chen, N.F., Roll, R. and Ross, S.A. (1986), "Economic Forces and the Stock Market", Journal of Business, Vol. 59 No. 3, pp. 383-403.
Cheung, Y.W. and Ng, S. (1998), "International Evidence on the Stock Market and Aggregate Economic Activity", Journal of Empirical Finance, Vol. 5 Issue 3, pp. 281-96.
Tsoukalas, D. (2003), "Macroeconomic Factors and Stock Prices in the Emerging Cypriot Equity Market", Managerial Finance, Vol. 29 No. 4, pp.87-9.
Dickey, D.A. and Fuller, W.A. (1979), "Distribution of the Estimators for Autoregressive Time Series with a Unit Root", Journal of American Statistical Association, Vol. 74 Issue 366, 427-31.
Dickey, D.A. and Fuller, W.A. (1981), "Likelihood Ratio Tests for Autoregressive Time Series with a Unit Root", Econometrica, Vol. 49 No. 4, pp. 1057-72.
Enders, W. (1995), Applied Econometric Time Series, John Wiley & Sons Inc., United States.
Elliott, G., Rothenberg, T.J. and Stock, J.H. (1996), "Efficient tests for an autoregressive unit root", Econometrica, Vol. 64 No. 4, pp. 813–36.
Campbell, J.Y. (1987), "Stock returns and the term structure", Journal of Financial Economics, Vol. 18 Issue 2, pp. 373-99.
Fama, E.F. and Schwert, G.W. (1977), "Asset Returns and Inflation", Journal of Financial Economics, Vol. 5 Issue 2, pp. 115-46.
French, K.R., Schwert, G.W. and Stanbaugh, R.F. (1987), "Expected Stock Returns and Volatility", Journal of Financial Economics, Vol. 19 Issue 1, pp. 3-29.
Gan, C., Lee, M., Yong, H.H.A. and Zhang, J. (2006), "Macroeconomic variables and stock market interactions: New Zealand evidence", Investment Management and Financial Innovations, Vol. 3 No. 4, pp. 89-101.
Gunasekarage, G., Pisedtasalasai, A. and Power, D.M. (2004), "Macroeconomic Influence on the Stock Market: Evidence from an Emerging Market in South Asia", Journal of Emerging Market Finance, Vol. 3 No. 3, pp. 285-304.
Hsing, Y. (2004), "Impacts of fiscal policy, monetary policy, and exchange rate policy on real GDP in Brazil: A VAR model", Brazilian Electronic Journal of Economics, Vol. 6 No. 1.
Husni, A.K., Walid, Z.S. and Mohammad, J. (2010), "The relationships between stock market capitalization rate and interest rate: Evidence from Jordan", Perspectives of Innovation in Economics and Business, Vol. 2 No. 2, pp. 60-6.
Johansen, S. (1988), "Statistical analysis of cointegration vectors", Journal of Economic Dynamics and Control, Vol. 12 Issues 2-3, pp. 231–54.
Johansen, S. (1991), "Estimation and hypothesis testing of cointegration vectors in Gaussian vector autoregressive models", Econometrica, Vol. 59 Issue 6, pp. 1551–80.
Maysami, R.C. and Koh, T.S. (2000), "A Vector Error Correction Model of the Singapore Stock Market", International Review of Economics and Finance, Vol. 9 Issue 1, pp. 79-96.
Mok, H. (1993), "Causality of interest rate, exchange rate and stock prices at stock market open and close in Hong Kong", Asia Pacific Journal of Management, vol. 10 No.2, pp. 123-43.
Mukherjee, T.K. and Naka, A. (1995), "Dynamic Relations between Macroeconomic Variables and the Japanese Stock Market: An Application of a Vector Error Correction Model", Journal of Financial Research, Vol. 18 No. 2, pp. 223-37.
Ng, S. and Perron, P. (2001), "Lag length selection and the construction of unit root tests with good size and power", Econometrica, Vol. 69 Issue 6, pp. 1519–54.
Osuagwu, E.S. (2009), "The effect of monetary policy on stock market performance in Nigeria", available at: http://www.unilag.edu.ng/opendoc.php?sno=15495&doctype=doc&docname=Monetary-Policy-and-Stock-Market-Performance-in-Nigeria (accessed 21 November 2011). Phillips, P.C.B. and Perron, P. (1988), "Testing for a unit root in time series regression", Biometrika, Vol. 75 No. 2, pp. 335–46.
Poon, S and Taylor, S.J. (1991), "Macroeconomic Factors and the UK Stock Market", Journal of Business and Accounting, Vol. 18 No. 5, pp. 619-36.
Rahman, A.R., Zidek, N.Z.M. and Tafri, F.H. (2009), "Macroeconomic determinants of Malaysian stock market", African Journal of Business Management, Vol. 3 No. 3, pp. 95-106.
Ross, S.A. (1976), "The Arbitrage Theory of Capital Asset Pricing", Journal of Economic Theory, Vol. 13 Issue 3, pp. 341-60.
Samarakoon, L.P. (1996), "Stock market returns and inflation: Sri Lankan evidence", Sri Lankan Journal of Management, Vol. 1 No. 4, pp. 293-311.
Wickremasinghe, G. (2011), "The Sri Lankan stock market and the macroeconomy: an empirical investigation", Studies in Economics and Finance, Vol. 28 Issue 3, pp.179 - 195.
StataCorp. (2009), Stata Time Series Reference Manual Release 11, Stata Press, Texas, TX.